Houston CPA, Accounting Firm and Business Advisory with International Experience. CPA 2.0 the next generation CPA consultancy.

Taxes

12/03/2012

For several years now, Congress has left the taxpaying public hanging to the last minute with tax changes and extensions. And each year, the political gridlock seems to get worse, leaving taxpayers pondering how to plan their finances and businesses undecided about capital investments and hiring new employees, not knowing what the tax laws will bring in the next year.

This year is even worse: It seems that our politicians are preoccupied with the elections and have put on the back burner a whole host of tax issues that have expired or are going to expire in the near future, once again leaving taxpayers in the dark and at risk of some substantial tax increases. There are more tax provisions expiring this year than ever before. In fact, if Congress does nothing, there will be a huge tax increase across the board affecting just about every taxpayer, rich and poor alike. Federal Reserve Chairman Bernanke referred to this problem as a "fiscal cliff."

To understand the enormity of the problem, here is a rundown of a number of the more significant expiring provisions:

Capital Gains Rates Increase

Tax Rates (Brackets) Increase

The 2011–2012 Payroll Tax Cuts Expire - This means that for 2013, the payroll and self-employment taxes will increase by 2% on all earned income up to $113,700. This will result in increases of up to $2,274 for working Americans.

Beginning in 2013, the maximum capital gains rates will increase from the current 15% (0% for lower-income taxpayers) to 20% (18% for assets held more than five years). For lower-income taxpayers, the maximum rate will be 10% (8% for assets held for more than five years).

Education Benefits Take A Hit

- After 2012, several education benefits will expire or be reduced, primarily impacting middle- and lower-income Americans. o American Opportunity Education Credit – A tax credit that provides up to $2,500 for the first four years of post-secondary education, a portion of which is refundable. The Hope Education Credit will take the place of this credit, but it will be limited to the first two years of post-secondary education, providing a reduced maximum credit of $1,950, none of which is refundable. Three fundamental changes will occur in 2013. (1) The 10% bracket will disappear (the lowest bracket will be 15%). (2) The size of the 15% tax bracket for joint filers and qualified surviving spouses will be 167% (rather than 200%) of the size of the 15% tax bracket for individual filers. (3) The top four brackets will rise from 25%, 28%, 33% and 35% to 28%, 31%, 36% and 39.6% respectively. This represents an across-the-board tax increase for all taxpayers.

Coverdell Education Accounts – These will have their annual contribution cap reduced to $500 from the current $2,000 limit.

Student Loan Interest – This will only be allowed for the first 60 months in which interest is due and the deduction is phased out for most middle-income Americans. Previously there was no time limit for this deduction.

Lower-Income Taxpayers Lose Benefits

"Obamacare" Taxes Kick In

Increased Hospital Insurance Tax – Currently a 1.45% payroll deduction, this will increase to 2.35% on wages in excess of $200,000 for unmarried individuals and $250,000 for married individuals filing jointly. The same increase applies self-employed individuals.

- Two taxes to fund Obamacare apply to higher-income individuals beginning in 2013. o Surtax on Net Investment Income – The official name of this new tax is the "Unearned Income Medicare Contribution Tax." It imposes a 3.8% surtax on the net investment income (interest, capital gains, rents, royalties and annuities) of individuals with incomes of $200,000 ($250,000 for joint filers) or more. - The most significant changes taking place after 2012 include: The Child Tax Credit will be chopped in half to $500; the Earned Income Tax Credit bracket for taxpayers with three or more children will be eliminated; and the creditable expenses for the Child Care Credit will drop to $2,400 (formerly $3,000) for one child and $4,800 (formerly $6,000) for two or more children.

It is anticipated that some of the provisions discussed in this article will be extended when Congress finally gets around to it, but no one knows for sure which. However, it is important that you be ready for any eventuality, given that everything is in limbo at this time.

This office is closely following tax changes and is here to help you avoid any tax "fiscal cliffs" created by the ever-changing tax laws. Please call if you have questions or wish to do some year-end planning for yourself, or if family members or friends need assistance.

07/24/2012

For small business owners, tax breaks often come in the form of tax deductions – which can offer a nice little instant cash savings – if you know how to navigate tax law and claim the deductions you deserve (not what you believe you are entitled to).

Large tax deductions are a notorious red flag for the IRS, with home-based businesses, in particular, facing an increase in tax audits due to suspicious deduction activity on income tax returns.

To help you navigate the complex world of business tax deductions, here is some foundational guidance that will help you take the deductions that you deserve.

Recordkeeping - Whatever the deductible expense may be, it is essential to maintain adequate records. There are many bookkeeping and accounting computer software programs available that will provide the basics for tracking expenses. But it is also important to keep receipts, invoices, etc., to back up the numbers. Some types of expenses require additional documentation, such as a log book or diary for business use of your personal vehicle or notations as to the business purpose of the expense (see Entertainment Expenses below). Keeping these records up-to-date will be a time-saver in the long run, especially if the IRS selects your return for audit.

Business Expenses vs. Capital Expenses - One of the first concepts a small business owner needs to understand is the difference between what can be expensed and what must be capitalized.

Business expenses are expenses that can be deducted in the current year, such as: business travel, rents, utilities, supplies, insurance, wages, customer entertainment and tangible items with a useful life of no more than one year or cost less than $100. If you are a for-profit, these expenses are usually tax-deductible.

Capital expenses are those associated with purchasing fixed business assets, such as property and equipment that has a useful life of more than one year, and must be capitalized and depreciated over a period of years rather than be deducted as current year expenses. The number of depreciable years depends on the type of property. Here are some examples: office furnishings – 7 years, autos and light trucks – 5 years, computer equipment - 5 years, residential rental – 27.5 years, commercial rental – 39 years.

Sometimes even capital items can be expensed all in one year by electing to use a special provision of the tax code that allows personal tangible property, such as computers, office equipment, tools and machinery, to be deducted in full in the year the property is placed into service. The maximum amount that can be expensed for 2012 is $139,000, subject to certain limitations. This is down from the 2011 $500,000 limit.

A special provision for 2011 permits certain real property, such as qualified leasehold improvements, restaurant property and retail improvements, to be expensed, although no more than $250,000 of the $500,000 expense limit can be applied to these real property assets. For 2012, the special first-year bonus depreciation drops back to 50% (was 100% in 2011).

Although repairs are generally considered to be currently deductible expenses, there are occasions when that may not be true. If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated. If not, it can be deducted like any other business expense.

Common Business Expenses - Below are some typical types of business expenses that qualify for deductions and special rules associated with them.

Car Expenses – To take the business deduction for the use of your car, you must determine what percentage of the vehicle was used for business, based on a ratio of business miles to total miles driven. Deductible costs can include the cost of traveling from one workplace to another, making business trips to visit customers or to attend meetings, or traveling to temporary workplaces. Be sure to maintain complete mileage records. However, commuting to and from your regular place of business is not a business expense. When it comes to claiming car expenses, there are two methods:

a) Actual Expenses – Add your annual car operating expenses including gas, oil, tires, repairs, license fees, lease payments, interest on vehicle loans, registration fees, insurance and depreciation). Multiply the car operating expenses by the percentage of business usage to get your deductible expense. Business-related parking and road/bridge tolls are fully deductible and don't have to be reduced by the percentage of business use. Note: the interest paid on vehicle loans is not deductible by employees who use their personal vehicles on the job.

b) Standard Mileage Rate – The standard rate changes each year. For 2012, it is 55.5 cents per mile for each business mile driven. Business-related parking costs, road/bridge tolls, and the business-use portion of interest paid on vehicle loans (for other than employees) are also deductible when the standard mileage rate method is used.

Business Use of Your Home - If you use part of your home for your business, you may be able to deduct expenses for items such as mortgage interest, insurance, utilities, repairs, and depreciation. To qualify, you must meet the following criteria:

a) The business part of your home must be used exclusively and regularly for your trade or business. However, there are exceptions for daycare facilities or storage of inventory/product samples.

b) The business part of your home must be: - The principal place of business, or - A place where you meet or deal with patients, clients, or customers in the normal course of your business, or - A separate structure (not attached to your home) used in connection with your business.

Entertainment Expenses – This includes any activity considered to provide entertainment, amusement or recreation. To be deductible, you must generally show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your business. Recordkeeping is essential – you will need to keep a history of the business purpose, the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. Entertainment expenses are usually subject to a 50 percent limit.

Travel Expenses – These are “ordinary” and “necessary” expenses while away from home when the primary purpose is conducting business. Your home is generally considered to be the entire city or general area where your principal place of business or employment is located. Out-of-town expenses include transportation, meals, lodging, tips, and miscellaneous items like laundry, valet, etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record the business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses - lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense (proves you were out-of-town). However, if any other business expense is less than $75, a receipt is not necessary if you record all the information in a timely diary. You must keep track of the full amount of meal expenses, even though only 50% of the amount will be deductible.

Local Lodging - In a change of position, in April 2012, the IRS proposed regulations that allow the costs of certain lodging when not traveling away from home (local lodging) as a business deduction. The lodging, which cannot be lavish or extravagant, must be necessary to participate fully in or be available for a business-related meeting, conference, training session or other business function. The lodging period can be no more than 5 calendar days and is limited to once per quarter. The lodging cannot provide any significant element of personal pleasure, recreation or benefit. The new rules apply to expenses paid in prior years where the statute of limitations for claiming refunds is still open.

Conventions – It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that convention timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.

Where a companion, such as a spouse, accompanies the taxpayer, the companion's meals and travel expenses are generally not deductible. In addition, deductible-lodging expense is based upon the single occupancy rate.

There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer's trade or business. The cruise ship must be a vessel registered in the United States. All ports of call must be located in the U.S. or any of its possessions.

Note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area. Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting's purpose, the sponsor's purpose and activities, the residence of the organization's members, the locations of past and future seminars.

Marketing and Advertising Expenses - Although marketing and advertising is generally thought of in terms of print ads, flyers and radio and television advertising, they also can include marketing that is intended to portray a business positively. Such marketing creates a long-term potential for business and falls within the ordinary and normal requirements of the tax code.

Examples of such marketing include sponsoring local youth sports teams, distributing samples of your business product, and costs associated with prizes offered by your business in a contest. As long as your marketing expenses can be reasonably related to the promotion of your business, they can be deducted.

The foregoing is a brief overview of some of the many deductions available to the small business owner. However, every business is different and has its own unique expenses. If you have questions related to deductible expenses for your business, please give this office a call.

07/10/2012

Without Congressional action before the end of the year, just about everyone, rich and poor alike, will be hit by tax increases. These increases are the result of temporary tax benefits that will expire at the end of 2012.

Just about everyone will be affected in one way or another. The following is a list of the expiring benefits and how taxpayers will be affected. Check the list for items that will apply to you to get an idea of how your taxes will be impacted.

Bonus Depreciation Expires – For several years, businesses have been able to take advantage of bonus depreciation that essentially allows a 50% (100% during some periods) depreciation deduction of the cost of qualified business equipment and machinery in the first year it is placed in service. The big business write-off expires after 2012. Impact: Larger businesses.

Coverdell Education Accounts – Some years back, the tax benefits related to Coverdell Education Accounts were liberalized and made more beneficial to taxpayers. Those liberalized benefits will no longer apply after 2012. The most notable of these changes are: the dollar limit on contributions for any one beneficiary is reduced to $500 from $2,000, contributions can be made only by individuals, the modified AGI phase-out range for the annual contribution limit will be $150,000 - $160,000 for joint filers instead of twice the amounts for single filers ($95,000 - $110,000), contributions for special needs students age 18 or over will no longer be allowed, contributions for the tax year must be made by December 31 (was April 15 in the following year), qualifying expenses will no longer include those related to elementary or secondary school expenses, contributions to a Coverdell account and a Sec 529 Qualified Tuition Program will no longer be allowed in the same year, and education credits cannot be taken in a year in which a Coverdell withdrawal is made. Impact: Lower to moderate income families.

American Opportunity Tax Credit Expires – The American Opportunity Tax Credit (AOTC), which took the place of the Hope Education credit beginning in 2009, will expire after 2012. This liberalized credit provided a credit of up to $2,500 (the Hope credit provided only $1,800), and where the Hope credit could be used only to offset a taxpayer’s tax liability, up to 40% of the AOTC is refundable in many instances. In addition, the ATOC provided 4 years of credit, while the Hope credit only applies for two years. The AOTC expires after 2012. Impact: Lower income families.

Higher Education Loan Interest – A deduction of up to $2,500 is allowed for interest paid on loans for higher education. This deduction was originally limited to the first 60 months for which the interest payments were required. Congress subsequently temporarily eliminated the 60-month limitation and increased the AGI phase-out. Beginning in 2013, the 60-month rule returns and the AGI phase-out ranges (before adjustment for inflation) will be reduced to $60,000 - $75,000 for joint filers and $40,000 - $55,000 for other filers (except married couples filing separately who are barred from claiming this deduction). Impact: Lower to moderate income taxpayers.

Alternative Minimum Tax (AMT) – Congress originally implemented the AMT to impose a minimum tax on higher-income taxpayers who were avoiding taxes through tax shelters and other legal means. However, years of inflation without corresponding adjustment to the AMT components have, each successive year, caused an increasing number of taxpayers to be subject to the AMT.

Much as the regular income tax allows personal exemptions, the AMT calculation allows an exemption, but based upon filing status. For the past several years, Congress has, on a year-to-year basis, increased that exemption for inflation. However, should they fail to provide an increase for 2012 and 2013, the exemption amounts would revert to levels not seen since the early 2000s, which, depending upon filing status, would result in an approximate 30% to 40% decrease in the exemption amount. For example, the exemption amount for joint filers would drop from 2011’s $74,450 to $45,000. The reduction of the exemption amount would snare a significantly greater number of taxpayers for 2012 – estimated to be around 31 million versus 4 million for 2011. Impact: Generally, middle income taxpayers.

Child Tax Credit – Since 2003, the child tax credit has been $1,000 for each qualified child of a taxpayer who is under the age of 17 at the end of the year. However, this was a temporary provision that expires at the end of 2012, and, beginning in 2013, the credit will revert to $500 per child. In addition, the refundable portion of the credit will be reduced. Impact: Lower income taxpayers with children.

Child & Dependent Care Credit - As part of the Bush-era tax cuts, the maximum expenses qualifying for dependent care credit were raised from $2,400 ($4,800 for two or more qualifiers) to $3,000 ($6,000 for two or more qualifiers) and the income-based maximum credit percentage was raised from 30% to 35%. However, these increases are scheduled to revert to the lower amounts in 2013. Impact: Lower income working taxpayers with children.

Earned Income Tax Credit– In 2009, a credit category for three or more children was added, providing an increased credit for taxpayers with three or more qualifying children. However, that was a temporary measure which will expire at the end of 2012. This will reduce the maximum credit for individuals with three or more children by $650 in 2013. Other changes that enhanced and simplified the credit computation are also set to expire. Impact: Lower income taxpayers with large families.

In addition to the expiring benefits listed above, depending upon what the Supreme Court ultimately decides about the Health Care Law, the following provisions of the Heath Care law will take effect in 2013:

Increased Hospital Insurance Tax – The Hospital Insurance (HI) tax rate (currently at 1.45%) will be increased by 0.9 percentage points on individual taxpayer earnings (wages and self-employment income) in excess of compensation thresholds for the taxpayer’s filing status. Thus, the wage withholding HI rate will be 1.45% up to the income threshold and 2.35% (1.45 + 0.9) on amounts in excess of the income thresholds. The hospital insurance portion of the SE tax rate will be 2.9% up to the income threshold and 3.8% (2.9 + 0.9) on amounts in excess of the threshold. The income thresholds where this increase begins is $250,000 for married taxpayers fling jointly, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers. Impact: Higher income working families.

Surtax on Unearned Income - A new surtax called the Unearned Income Medicare Contribution Tax is imposed on the unearned income of individuals, estates, and trusts. For individuals, the surtax is 3.8% of the lesser of:

The taxpayer’s net investment income or

The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others)

“Net” investment income is investment income reduced by allowable investment expenses. Investment income includes: Income from interest, dividends, annuities, royalties, rents (other than those derived from a trade or business), capital gains (other than those derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to the trading of financial instruments or commodities. For surtax purposes, modified adjusted gross income doesn't include excluded items such as interest on tax-exempt bonds, veterans' benefits, and excluded gains from the sale of a principal residence. Impact: Higher income families.

Employer Health FLEX-Spending Plan Contributions Limited – In order for a health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for the reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the employee under the health FSA for a plan year (or other 12-month coverage period) cannot exceed $2,500. Impact: All taxpayers participating in health FSAs.

Medical Itemized Deductions Limited - The AGI threshold percentage for claiming medical expenses on a taxpayer’s Schedule A will be increased from 7.5% to 10%, which is the same as the current threshold percentage for alternative minimum tax (AMT) purposes. Individuals (and their spouses) age 65 (before close of year) and older will continue to use the 7.5% rate through 2016. Impact: Higher income taxpayers.

Keep in mind that Congress could and probably will extend some of the provisions. In addition, the Supreme Court is considering the validity of the health care provisions. Even so, it may be appropriate to review your tax situation and plan for all eventualities.

Please give this office a call if you would like to schedule a planning session for steps you can take now to mitigate the changes coming in 2013.

06/28/2012

Without Congressional action before the end of the year, just about everyone, rich and poor alike, will be hit by tax increases. These increases are the result of temporary tax benefits that will expire at the end of 2012.

Just about everyone will be affected in one way or another. The following is a list of the expiring benefits and how taxpayers will be affected. Check the list for items that will apply to you to get an idea of how your taxes will be impacted.

Exemption Phase-Out - Each taxpayer is entitled to a $3,800 (2012) tax exemption (deduction) for him or herself, his or her spouse, and each dependent. Beginning in 2013, a phase-out (reduction) of the exemptions will return for higher income taxpayers. The otherwise allowable exemption amounts will be reduced by 2% for each $2,500 or part of $2,500 ($1,250 for married filing separately) that the taxpayer's AGI exceeds the AGI threshold for the year based on the taxpayer's filing status. The threshold amounts for 2013 have not been announced yet but will be inflation-adjusted amounts from 2009 (the last year when this rule applied). These amounts were $372,700 for married taxpayers filing jointly, $186,350 for married taxpayers filing separately, $331,000 for head of household filers, and $289,300 for single filers. Impact: Higher income families.

Itemized Deduction Phase-Out - Beginning in 2013, higher income taxpayers will again be subject to the phase-out of itemized deductions. Not all itemized deductions are subject to phase-out. The following are the ones subject to phase-out: taxes, interest (except investment interest), charitable contributions, employee job expenses and other miscellaneous itemized deductions (excluding gambling and casualty or theft losses).

If the itemized deductions are subject to the limit, the total of all itemized deductions is reduced by the smaller of: 1) 3% of the amount by which the AGI exceeds the annual limit, or 2) 80% of the itemized deductions that are affected by the limit. The threshold amounts for 2013 have not been announced yet but will be inflation-adjusted amounts from 2009, which were $83,400 for married taxpayers filing separately and $166,800 for all others. Impact: Higher income families who itemize their deductions.

Payroll Tax & Self-Employment Tax - Both the payroll withholding tax and self-employment tax rates have been reduced by 2 percentage points for two years. Payroll FICA withholding will return to 6.2% (up from 4.2%) and self-employment tax will return to 12.4% (up from 10.4%) beginning in 2013. Impact: All working taxpayers.

Long-Term Capital Gains Rates Increase – Taxpayers have enjoyed reduced long-term capital gains rates for several years as a result of the Bush-era tax cuts. However, those reduced rates will return to the higher rates in effect prior to 2003. The table below compares the current long-term capital gains rates to the anticipated rates for 2013 and subsequent years. Taxpayers with unrealized gains in investment property they’ve held for over one year may want to consider selling some or all of those assets in 2012 to lock in the lower long-term capital gains rate on their gains. Impact: All taxpayers with long-term capital gains.

Regular Tax Rates – In addition to lower long-term capital gains rates, the regular marginal tax rates have been declining since 2001. However, without Congressional action, those reduced rates will return to the higher rates that were in effect prior to 2001. The table below compares the current marginal individual tax rates to the anticipated rates for 2013 and subsequent years.

These increased rates will apply to all varieties of ordinary income, including interest, dividends, short-term capital gains, employment income, etc. Marginal tax rates increase as a taxpayer’s overall income increases, taxing the first block of income received at the lowest rate and each subsequent block at ever-increasing rates until the maximum rate is reached. As with assets eligible for the long-term capital gains rates, it may be appropriate for some taxpayers to accelerate ordinary income into 2012 to take advantage of the lower rates. Impact: All taxpayers.

05/29/2012

Last month, we cautioned you about Internet scams aimed at tricking you into divulging information that will compromise your identity. That article described how Internet crooks disguise themselves as the IRS in an attempt to steal your identity.

The IRS is not the only disguise these scammers use. They pretend to be attorneys representing estates, lottery payouts, and other such subterfuge to draw you into their web.

Here are some good rules to follow: 1. If it’s too good to be true, it probably isn’t true.

2. If you receive a request for financial information via the Internet, it is probably a scam.

3. Never give your financial information over the Internet except when you are absolutely sure with whom you are dealing.

Take this example of how clever scammers can be. The latest scam is an e-mail requesting individuals to update their Intuit accounts. The e-mails claiming to be from Intuit ask recipients go to what is supposed to be an Intuit web site and update their tax return information. The e-mail includes an Intuit logo in the header. The scammer selected Intuit as the bait because so many individuals and small businesses use their Quicken and Quickbooks products.

So do not be fooled by this scam or any others that do not make sense. Do not be hasty; stop and carefully consider what you are doing before you click on a link to a potentially dangerous web site. These people are clever and can disguise their scams well.

If you ever have questions related to suspect e-mails, please call our office before responding to them.

05/22/2012

Reporting Stock Transactions Becomes More ComplicatedBeginning with the 2011 tax return, reporting stock transactions has become significantly more complicated because of the new requirement for brokerage firms to track the purchase price of stocks acquired in 2011 and subsequent years and to include that information on the information-reporting document 1099-B.

For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.

This new system of reporting is not a solve-all solution for the IRS because it does not have the cost or basis information for securities acquired prior to 2011 or for securities acquired by gift or inheritance. Special adjustments are required for wash sales and when sales can be attributed to a prior purchase of the same security. Some brokers also may report on Form 1099-B the cost information, if known, for stocks purchased prior to 2011.

So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included on the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets): • Long-term sales where the broker IS reporting the cost of the security • Short-term sales where the broker IS reporting the cost of the security • Long-term sales where the broker IS NOT reporting the cost of the security • Short-term sales where the broker IS NOT reporting the cost of the security • Long-term sales for which no 1099-B is issued • Short-term sales for which no 1099-B is issued To accommodate separating the transaction into the six categories, the IRS has provided a new Form 8949. A separate 8949 must be used for each category. This will allow the IRS to match and verify transactions where the brokerage firm supplied the cost basis.

Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.

Please call our office if you have questions relating to reporting your security sales this year.

04/17/2012

If you took advantage of the escalating gold and silver prices and made any sales of gold, silver, gems, jewelry, or the like during 2011, you are required to report the sales on your tax return. Whether or not the sales are subject to tax, and at what tax rate, depends upon the type of item sold and your tax basis for the item.

Determining Basis - Generally, your tax basis is what you originally paid for the item, assuming that you can recall the amount. It may be difficult to remember how much you paid for an item; however, if the cost was significant, you hopefully have documentation that can verify the price. Without documentation, you are at the mercy of the IRS should you be audited! Even more complicated is determining the value of an item acquired as a gift. Your tax basis for a gift generally is the same basis as it was for the item in the hands of the individual who gave you the gift. Meanwhile, the basis for an item acquired by inheritance is generally the fair market value of the item on the date of the inheritance. As you can see, simply determining the basis for the items that you sold can be complicated.

Types of Items Sold - Not all items are taxed the same. The percentage depends on whether the item was held for personal use or for investment purposes and whether or not the item is classified as a collectible. A higher maximum tax rate applies to collectibles than to other capital assets.

Jewelry - Generally, jewelry that is held for personal use is excluded from the definition of collectibles and is taxed the same as any other personal use property. Losses are thus not allowed, and gains are taxed as either short-term or long-term capital gains. For the most part, jewelry that an individual may choose to sell will have been owned for over a year, and the gain will be taxed at the long-term rate, which, for 2011, is a maximum of 15% (0% to the extent that the taxpayer is in the 15% regular tax bracket or lower). Beware, however, as some jewelry may include gold or silver coins that are considered collectible items and thus may be taxed at a higher rate, as explained below.

Collectibles - Gold and silver coins and bullion are included on the IRS’s list of collectibles. Unlike jewelry, the sale of “collectibles” can result in either a taxable loss or a taxable gain. In addition, collectible gains are taxed at a maximum rate of 28%, as opposed to a maximum of 15% for other capital assets that are held long-term. The maximum rate does not imply that all collectible gains are taxed at 28%. A taxpayer in a lesser tax bracket will be taxed at that lesser rate.

If you have questions related to selling jewelry and collectibles, please give the office a call.

04/10/2012

It’s not too late to make an IRA and/or SEP contribution or undo a Roth IRA conversion for 2011.

Generally, after the close of the year you can no longer take steps to alter the outcome of your tax return. However, both IRA contributions and SEP contributions can be made for a year after it has closed, and if you converted a traditional IRA into a Roth IRA, you can undo that conversion after the close of the year. Here are the details:

Traditional IRA Contributions - IRA contributions (tax-deductible and non-deductible) for 2011 can be made up to and including the un-extended filing due date for your 2011 tax return, which is April 17, 2012. The maximum contribution allowed is $5,000 ($6,000 if age 50 or over) for each taxpayer. The annual maximum must be allocated between traditional and Roth IRA contributions.

If you are an active participant in an employer-sponsored plan, the IRA contributions are phased out for higher income taxpayers. The traditional IRA AGI phase-outs for 2011 are: between $90,000 and $110,000 for married individuals filing jointly and individuals qualifying as a surviving spouse, $56,000 and $66,000 for unmarried individuals, and $0 to $10,000 for married individuals filing separately.

Where one spouse participates in an employer plan but the other does not, the non-participating spouse’s phase-out is between $169,000 and $179,000 for 2011.

SEP Plan Contributions – SEP plans are tax-deductible retirement plans for self-employed individuals. Contributions can be made up to and including the extended due date, which for the 2011 tax return is October 15, 2012. The maximum annual contribution to a SEP plan is the lesser of “25% of compensation” (20% of net profit after deducting the SEP contribution for the self-employed proprietor’s contribution) or $49,000. SEP plans have no AGI phase-out limitations and no catch-up contributions for older individuals.

Roth IRA Conversions – If you made a conversion from a traditional to a Roth IRA, there is a good chance the entire conversion is taxable. Generally, people plan those conversions for years with low income or when the stock market is down and the IRA value at the time of the conversion is low. However, if subsequent to the conversion conditions change, and you wish you hadn’t made the conversion, or you simply decide you can’t afford to pay the tax on the conversion, you can undo the conversion up to and including the extended due date of the return (October 15, 2012 for 2011 returns). However, don’t wait until the last minute to make that decision because it will require some paperwork on the part of the trustee (bank, broker, etc.).

Other plans – Other plans such as Simple Plans and Keogh plans also permit contributions in 2012 for 2011.

For additional information related to making retirement plan contributions after the close of the tax year, please give this office a call.

04/03/2012

New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn't provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn't reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain if you are required to file Form 8938, please give this office a call to discuss your particular situation.

03/27/2012

Now that tax season is upon us, so are the e-mail scammers pretending to be the IRS. Most of these scams fraudulently use the IRS name, logo, and/or website header as a lure to make the communication appear more authentic and enticing. They lead you to believe you had a refund of some sort coming and request personal information. The goal of these scams - known as phishing - is to trick you into revealing your personal and financial information. The scammers can then use your information - like your Social Security number, bank account, or credit card numbers - to commit identity theft or steal your money.

DON’T BE A VICTIM – THE IRS DOES NOT INITIATE E-MAIL CORRESPONDENCE

The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious e-mails, phone calls, faxes, or notices claiming to be from the IRS. If you find something suspicious, you should immediately call this office before responding. In fact, it is a good policy to check with this office before responding to any inquiry from the IRS or state or local tax agencies.

Here are some tips you should know about phishing scams.

1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank, or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

Do not reply to the message.

Do not open any attachments. Attachments may contain malicious code that will infect your computer.

Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call this office before responding or providing any financial or personal information. Better safe than sorry!